What does "earnest money" signify in a real estate transaction?

Earnest money signifies a deposit made by the buyer to demonstrate good faith in a real estate transaction. This amount is typically included with the purchase offer and is held in escrow until the sale is finalized. The purpose of earnest money is to show the seller that the buyer is serious about purchasing the property and has the financial commitment to follow through with the deal.

If the transaction goes smoothly and the buyer completes the purchase, the earnest money is usually credited toward the buyer's down payment or closing costs. Conversely, if the buyer fails to fulfill their obligations under the contract without a valid reason, the seller may keep the earnest money as compensation for the time and opportunity lost by not pursuing other potential buyers.

This financial commitment is crucial for ensuring that all parties involved take the transaction seriously and helps foster trust between buyers and sellers in real estate dealings.